Media and crisis management is the most visible side of PR. But most of WHAM’s work involves sustained behind-the-scenes work, helping our clients communicate effectively with their customers, staff and other stakeholders. More…

29 September 2008

Does Fonterra deserve its Sanlu punishment?

Fonterra is facing a major crisis over the way it and Sanlu, which it 43% owns, handled the recall of Sanlu's infant formula
contaminated with the toxic protein-boosting agent melamine.

Some highly emotional criticism has been fired in
Fonterra's direction, as might be expected given the nature of the crisis. The
human implications of contaminating infant formula on such a scale are
horrendous.

But are the media and everyone else who is having a go at Fonterra judging the
dairy giant fairly? Or how much of the criticism is driven by a media pack
mentality and a thirst to pass judgement?

Coincidentally, the coroner last week released his judgement on the unfortunate
case of Mrs Folole Muliaga who died last year after a contractor for Mighty
River Power disconnected power to her house. As a result, the oxygen
concentrating machine on which she relied for respiration ceased to function.

Mrs Miliaga's death triggered a media storm which pummelled Mighty River Power,
the district health board and the unfortunate contractor. Words like
‘manslaughter' and ‘murder' were tossed around with scant consideration for the
lack of facts about what happened on the disconnection day and with even less
regard for the impact this might have on the contractor involved.

The coroner's decision, many months later, has totally exonerated the
contractor. But no doubt the bruising effects of media molestation will stay
with the contractor and his family for the rest of their lives.

Sure, there were huge gaps in the district health board's procedures. And the
standard of PR practice in Mighty River and its subsidiary Vectra were clearly
lamentable. But there was no manslaughter. No murder.

So, if we ever get to know the facts of what happened with Sanlu (which is far
from likely), how fair will the judgements of Fonterra by the media and the
commentariat be in the cold, hard, light of day?

First off, it is hard not to be amazed by the supposed expertise that so many
New Zealand commentators have about the complexities of doing business in
China, a third world country with a Communist Party dictatorship and a culture
that has almost nothing in common with our western world.

Putting aside the cultural complexities, we are talking about a regime which
has yet to adopt the rule of law as we would recognise it. Where capital
punishment is regularly applied to defendants who don't enjoy the rights we in
the west consider normal.

Then there is the matter of dual civil and Communist Party jurisdictions, that
overlap on a county, state and national level. On top of that, in many regions
there is a military administration that reports direct to Beijing, as does the
Public Security Bureau.

Given these realities WHAM believes the biggest mistake
that Fonterra has made was to get involved in Sanlu in the way it did. A 43%
shareholding in a Chinese food manufacturer inevitably had more downside than
upside for Fonterra.

Look at the equation for a moment. The Chinese partner got Fonterra's capital,
world-class food manufacturing and distribution expertise, and most importantly
the cred that came with being associated with a world brand leader. In return,
Fonterra got a toehold in a market where food integrity scandals are an almost
daily occurrence.

What a price to pay. Putting your brand – your most
important asset – at risk in return for getting market knowledge that could
have been achieved in many other, less risky, ways. If Fonterra was going to
buy into Sanlu, its shareholding should have either been below 10% or been
large enough to give it day-to-day control.

The second mistake was not to have anticipated the risk and to have a
Fonterra-controlled plan in place to deal with it. No business likes scandal,
in New Zealand or China, but in China the consequences both legal and cultural
(loss of face) of admitting failure are so much greater. Getting Chinese
managers to ‘fess up' quickly – one of the first pieces of advice in any crisis
manager's toolbox – was always going to be a huge hurdle.

Beyond those fundamental errors, it is still too early to determine what level
of blame Fonterra should shoulder for the failure of the company to get a
product recall into the public arena. As many have pointed out, 1 August – when
Fonterra first learned about the scandal – to 11 September, when the western
media found out, is a very long time.

But it's a long time only in a western context. For the reasons explained
above, it is not a very long time in China – especially when the period covered
the Olympics.

The only remaining mystery is why, when Fonterra had six weeks to prepare for
the public release of news about the crisis, they made such a hash of it. The
company is famously defensive in its media relationships, but it does have the
benefit of the advice of Baldwin Boyle, one of the best large PR firms in the
business.

Waiting five days – from 11 September to Andrew Ferrier's live press conference
on 17 September – to explain yourself and most importantly, to apologise to the
victims, is such a breach of good PR practice that there must be a reason for
it. It was Fonterra's one chance to take some measure of control over their own
reputation and they blew it.

Since then, leaks of what are purported to be Sanlu internal memos have
appeared on Chinese blogs. These, according to the Sunday Star Times,
talk of Sanlu paying $640,000 for advertising on Baidu, a Chinese search
engine, in return for having negative stories blocked from search results.

While the Sunday Star-Times is describes this as a "PR Protection Deal",
it has as much to do with legitimate public relations practice as cooking the
books has to do with legitimate accountancy.

The big PR lesson Fonterra should be drawing from this nightmare is it failed
to require Sanlu to adopt world-standard reputation management practices as a
condition of its investment. Why not, we don't know.

But if the big co-op is so blind or negligent that it allowed a major
subsidiary to operate with a such an appalling lack of professionalism in such a
key business discipline, what does it say about the standards Sanlu was
applying in its other operational disciplines -- technical, HR, legal and
financial?

And if this was allowed to occur in China, what about South America and
elsewhere?

As with the Folole Muliaga tragedy, a lot of the media coverage arising from
the Sanlu disaster has been ill-informed, emotional and too quick to apportion
blame. But in both cases the core concerns of the public, as expressed
imperfectly by the media, are to do with the way large businesses deal with
ordinary human beings.

Would Folole Muliaga have died when she did, if a major power company had acted
professionally and humanely in its dealings with her family? Almost certainly,
no.

Would thousands of Chinese infants have been sickened by Sanlu's infant formula
if Fonterra had effectively controlled its Chinese investment and insisted on
the company adopting world-class business practice? Possibly. But would the
recall been carried out earlier, resulting in fewer ill children and less
damage to the brand. Almost certainly yes.

Fonterra deserves the hard time it is getting in the media. Hopefully the
traumatic lessons learned will mean no repeats.